Individuals and corporations engage in many forms of active and passive risk management to hedge and protect against the risk of certain losses and events. One common and accepted manner in which such risk of loss can be addressed is by transferring the risk of loss from one entity to another. In essence, a contract may be executed which effectively allocates the risk of loss to another party in exchange for predefined amounts of payments or premiums to be paid in exchange for the other party assuming the risk of loss.
More specifically, individuals purchase such contracts or insurance products for a variety of reasons, whether it is simply to ensure payment of funeral services, to provide additional income to the individual's family in case of an accident, or to provide financial security to a loved one. Corporations typically purchase or sponsor insurance products as a financing vehicle for benefit plans or to hedge against other liabilities. Consequently, there are a variety of different types of insurance products available for purchase.
For example, single premium insurance allows a purchaser to pay a one-time fee, or premium, in order to receive a fully funded insurance policy with a predetermined value (i.e. the face value). The benefit under such a policy depends on the individual insured, the premium paid, and the face value of the policy. Typically, the premium payment is deposited into an interest bearing cash value account. The interest rate is compounded at specific intervals, usually annually. The interest rate may change periodically, but a single premium insurance policy typically guarantees a minimum interest rate amount. In return, the insurance company charges a variety of fees, including an annual fee, a mortality risk fee, and an administrative fee.
In addition, insurance companies typically charge a large penalty on a single premium insurance policy if the insured withdraws money from the policy during the first few years. In addition, while the purchaser may take out a loan against the proceeds of this type of policy, interest rate charges may apply. The return of this type of policy is often unfavorable to the purchaser, since the up-front premium usually represents a large portion of the face value of the policy.
Term life insurance provides a predetermined benefit payment for a specifically designated time period, such as for one year, five years, ten years or fifteen years. The insurer only pays the face value if the insured person dies within the time frame in which the policy is in effect. If the insured person lives longer than the term of the policy, the policy expires and pays nothing. Consequently, term life insurance does not build any equity. The principal advantage of term life insurance is that it is relatively inexpensive. However, because of its speculative nature term life insurance is usually purchased as a means of temporary protection or when an individual can't afford the cost of other forms of life insurance.
There are renewable and non-renewable term life policies. With renewable term life insurance, a purchaser automatically re-qualifies and is able to continue the existing policy when the original term is up. However, when a non-renewable policy expires, the individual must take another physical and answer more health questions in order to re-qualify for a new policy.
In an effort to improve the characteristics of term life insurance, insurers offer riders to improve the return characteristics. For example, many term life insurance policies are convertible. Convertible term life policies allow the insured to exchange the term policy into a permanent form of life insurance. However, the costs associated with the conversion are high, lowering the return of this type of insurance policy.
Another type of insurance is permanent life insurance, which provides coverage throughout the entire life of the insured. Premiums are paid throughout the insured's life or for a portion thereof (e.g. for 10 years or 20 years). Further, the cash value portion of a permanent life insurance policy belongs to the insured and may be withdrawn as a loan. Alternatively, a permanent life insurance policy may be surrendered for a predetermined percentage of its face value. Premiums paid into a permanent life insurance policy are allocated between the insurance portion of the policy and the investment or cash portion of the policy. The investment portion of the policy is controlled by the insurance company in their general accounts, and usually consists of stocks, bonds and/or mutual funds. In addition, interest drawn on the investment portion of a whole life policy is usually tax-free until it is withdrawn.
Universal Life insurance is a variation of permanent life insurance. Universal life insurance separates the term life portion of the policy from the investment, or cash portion, of the policy. In addition, the investment portion of the policy is invested in money market funds as opposed to stocks, bonds and mutual funds. The cash value portion of the policy is held in an accumulation account where investment interest is credited to and death benefits are paid from. Consequently, the insured can vary the amount of the annual death benefit because it is contingent upon the underlying variable investments (although these are usually controlled by the insurance company).
There are two general types of universal life insurance. The first type provides a set death benefit for the insured regardless of premiums paid, which keeps the policy in force. The second type sets the death benefit for the insured equal to a set amount plus the current cash value of the policy at the time of the insured's death.
Variable life insurance and variable universal life insurance are also forms of permanent life insurance. As with other insurance policies, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses and part to the investment or cash value portion of the policy. The principal difference between variable life insurance and other types of insurance is that the insured is able to actively choose how to invest the funds in the investment portion of the policy. For example, the insured may select from an array of investments such as stocks, bonds, and mutual funds as long as they are within the insurance companies portfolio. However, variable life insurance may be generally more expensive than other forms of life insurance, and death benefits may fluctuate up or down depending on investment performance.
Universal life insurance and variable life insurance policies address the perceived disadvantages of permanent life insurance. Premiums are flexible and the internal rate of return may be higher because it moves with the financial markets. In addition, mortality costs and administrative charges are known.
However, both forms of insurance have similar disadvantages, which stem primarily from their flexibility. Cash values are not guaranteed and benefit payments can vary because these policies vary based on the timing and amount of premium payments. In other words, these types of insurance polices lapse unless the purchaser has paid a sufficient amount of premium payments to cover both the variable and fixed expenses of the product.
Other types of insurance are well known in the art. For example, disability insurance protects the insured against any loss of income attributable to an accident or sickness that renders the insured incapable of working. Some of the top reasons for becoming disabled are suffering an injury while working, suffering an injury outside of work or developing a disease. Thus, an important form of disability insurance is that provided through employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits workers' compensation and more general disability insurance policies.
Workers' compensation insurance pays benefits to employees who become unable to work because of a job related injury. However, workers' compensation is in fact more than just income insurance, because it may pay compensation for economic loss (i.e. reimbursement or payment of medical and like expenses), general damages for pain and suffering, and benefits payable to the dependents of workers killed during employment.
General disability insurance offers payments to employees who are unable to work or who are limited in their ability to work because of any injury or illness, even if it is not job-related. Additionally, in some instances general disability insurance may be offered at a negotiated group rate (i.e. as an employer or association sponsored benefit). Meaning, that the benefits of such a policy are similar to what an individual would buy, but they are purchased at a volume discount price.
These general types of disability policies tend to offer rather basic coverage essentially because most people prefer not to purchase any more coverage than they feel they have to, due to increased costs.
Individuals whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase their own policies. Premiums and available benefits for individual coverage may vary considerably between different companies, and for individuals in different occupations. In general, premiums are higher for policies that provide higher monthly benefits, pay the benefits for a longer period of time, and start payments of benefits more quickly following a disability. Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in a wider variety of circumstances.
In certain circumstances an individual may still be disabled upon the expiration of the maximum duration of benefits and thus unable to financially provide for him or her self as well as any possible dependents. In such circumstances the individual may still fit the qualifications of disability set forth in the insurance contract, however since the duration of benefits is expired the individual will receive no further benefits. Under standard disability plans known in the art, once the maximum duration of benefits has been exhausted, no further payment would be due to the insured individual.
In general, many employers do not offer disability insurance or offer insurance for a short duration. However, now and in the future, disability insurance will prove to be a valuable asset to offer employees. Additionally, critical illness insurance pays a lump sum or a series of payments if the insured is diagnosed with one of the critical illnesses covered by the policy. The types of conditions that are defined as critical illnesses vary and may contain as few as three diagnoses or may contain more than 20 diagnoses.
Critical illness insurance provides financial protection to insured individuals following the diagnosis or treatment of a covered serious illness. The benefits paid can be used for any purpose the insured wishes. In many cases the benefits are used to pay for the cost of treatment, the cost of care, or the cost of aids to recuperation. However, the benefits can also be used to pay other bills, to replace lost income due to a decrease in the ability to earn a sufficient income, and the like.
In general, the younger and healthier a person is, the cheaper it is to obtain life insurance, disability insurance, and the like. Conversely, it is more expensive for an older individual to purchase these types of policies. As a result, the various policies covering illness, accident, disability and death have greatly varying premium payments and payouts. Consequently, an individual who desires protection from one or more of these events must purchase an individual policy for each specific event. In short, if an individual wishes to mitigate the risks associated with an accident, illness, disability, or death, he or she must purchase four separate policies.
However, the probability of each of these events may change over time, rendering one or more of the policies moot and/or more important than another policy. Alternatively, an event may affect a person in a drastic manner yet only trigger one of the aforementioned policies. For example, suppose an individual has disability and illness insurance. If the individual becomes disabled and can not work as a result, the individual can likely only collect on the policy covering disability. It would be advantageous for an individual to have a unified policy that would ensure payment for more than one type of event. This attribute would provide substantial capability for the insurer to align protection with the customers anticipated needs.
Because there is currently no form of integrated insurance that mitigates financial hardship due to an accident, illness, disability, or death, there is a clear need in the art for such an insurance product which incorporates this feature. The present invention overcomes the various deficiencies associated with the prior art by creating a novel insurance product that provides the purchaser with protection against a wide spectrum of events such as an accident, illness, disability, or death.